Eurobutton

Well, it looked as though it was all getting a bit silly yesterday morning, with dealers even hitting bids in France 5yrs and reports of certain central banks and SWFs in Scandinavia desperate to get out of their Club Med exposures. As we mentioned yesterday, we are strongly of the view that a pre-emptive policy response addressing the systemic concerns that have grown is imminent, with our "preferred" response being a pan-European bank recapitalisation fund aimed at putting the banks in the position that they can buy more European government bonds and thus reverse the direction of the feedback loop between the banking system and the sovereigns. And while TMM accept that the Euro, peripheral bonds and EuroStoxx did not bottom immediately after the May 10th, as trapped longs used the bounce to get out (veterans of EM crises will be very familiar with this type of thing...), when things started to get silly in early June, with selling of France, the Euro and EuroStoxx put in a bottom almost to the day (June 8th) - see chart below (white line - EURUSD, orange - France-Germany 10yr spread, yellow -EuroStoxx). While yesterday's selling of France was not quite a large as it was in June, dealers do not hold the same volume of paper as they did then, so arguably there is now less leverage-driven selling. On that basis, TMM are wondering if *that* is *it* for the time being...

Now it appears from Baron Von Trichet's testimony to the European Parliament yesterday afternoon that he has come around to the idea that the ECB needs to step up a bit, as do the politicians. One of the problems for Europe has been the ongoing tension between the Bundeathstar wing of the ECB, which would very much like to hike rates, and the precarious position of Club Med, and the Baron's comments yesterday suggest that the former are losing the argument - it *is*, after all, about the future of the Euro... Indeed, the reports in the press overnight about a renewed round of stress test and a step-up in ECB bond buying has hinted at what is to come. But chatter in the market this morning about the ECB pushing the nuclear Eurobutton on two trillion Euros of bond buying seems a bit Dr. Evil-like to us, and TMM cannot imagine Darth Weber would stand by and allow such an horrific policy to be announced (mock shock horror) and we imagine he's powering up the Bundeathstar ready to take aim at those dusting off the ECB's printing press. But in seriousness, it does seem as though at least some sort of expanded bond-purchase programme is likely to be announced (and we are sure that Baron Von Trichet will remember the dramatic contagion seen after they did nothing at their May 5th meeting)...

...And it looks as though the political bribes are being dished out to ease Germany's objections to stepping up their Eurozone aid, with German Finance Minister Schaeuble being awarded the French Economic Prize for his role in fighting the EMU crisis. TMM will remind readers that this is the very same Schaeuble that ruled out aid to Greece in the first place, then called the Fed's policy "clueless" and finally was responsible for insisting on the Sovereign Debt Restructuring Mechanism (SDRM) post-2013, which in our view (and, it appears, many European politicians) is responsible for the most recent turmoil in the periphery. Sounds like the ideal candidate for such an award.

But given all the above, TMM is of the opinion that ECB bond-buying - if unsterilized - is a clear Euro negative, but it is a material positive for European equities and, with the S&P500/EuroStoxx relative performance back to the levels seen at the depth of the crisis (and Eurozone data surprises having turned up over the past two weeks) it might be worth countering this. On the other hand, if policy announcements are more along the lines of unsterilized bond buying coupled with a bank recapitalisation fund, then TMM expects both the Euro and EuroStoxx to rally.

Yes, well today ... we are back in la la land ... all is well, nothing can go wrong ... just accept the power of the "long/bernanke/ECB" put ...

Of course, the SP500 (the market) is still well below earlier highs so it is still very disappointing on either side of the fence.

Gold and Silver keep on giving for sure. And with the BOJ and the ECB only about to join the printing party, there is a lot more juice left in these two. China ... you say. Think the BOJ printing its way back to a USD/JPY of 120ish ... mmm liquidity!